Understanding China’s Growth: Past, Present, and Future

T he pace and scale of China’s economic transformation have no historical precedent. In 1978, China was one of the poorest countries in the world. The real per capita GDP in China was only one-fortieth of the U.S. level and one-tenth the Brazilian level. Since then, China’s real per capita GDP has grown at an average rate exceeding 8 percent per year. As a result, China’s real per capita GDP is now almost one-fifth the U.S. level and at the same level as Brazil. This rapid and sustained improvement in average living standard has occurred in a country with more than 20 percent of the world’s population so that China is now the second-largest economy in the world. To set the stage in this paper, I will begin by discussing briefly China’s historical growth performance: that is, how China went from the world’s leading economic power about 900 years ago to a situation in which it essentially missed the Industrial Revolution and had close-to-zero growth in per capita GDP from 1800 to 1950. I then present growth accounting results for the period from 1952 to 1978 and the period since 1978, using as my starting point a standard growth accounting exercise that decomposes the sources of growth into capital deepening, labor deepening, and productivity growth. For the period from 1952 to 1978, China’s per capita GDP did rise by about 3 percent per year, but all of the growth was due to forced increases in government investment as well as a rise in education levels. Productivity actually regressed during this period, as China’s economy went through the enormous disruptions of the famine in the late 1950s and the Cultural Revolution starting in the late 1960s. But the main focus of this paper will be to examine the sources of growth since 1978, the year when China started economic reform. Perhaps Understanding China’s Growth: Past, Present, and Future